The annual percentage yield allows investors to compare investments with different annual percentage rates (APR). It’s a way to do an apples to apples comparison. APY accounts for periodic compounding interest. As interest is added to the account, the next interest payment will be bigger. The longer an investor allows the account to compound interest, the bigger it will be at the end of some predetermined period.
It’s important to point out that APY does not take into account any fees. APR does account for fees. This is another difference between APY and APR.